Item 2. Management’s Discussion and Analysis
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward–Looking Statements
This report contains certain forward–looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, with respect to Horizon Bancorp, Inc. (“Horizon” or the “Company”) and Horizon Bank (the “Bank”). Horizon intends such forward–looking statements to be covered by the safe harbor provisions for forward–looking statements contained in the Private Securities Reform Act of 1995, and is including this statement for the purposes of these safe harbor provisions. Statements in this report should be considered in conjunction with the other information available about Horizon, including the information in the other filings we make with the Securities and Exchange Commission. The forward–looking statements are based on management’s expectations and are subject to a number of risks and uncertainties. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “expect,” “estimate,” “project,” “intend,” “plan,” “believe,” “could,” “will” and similar expressions in connection with any discussion of future operating or financial performance. Although management believes that the expectations reflected in such forward–looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements.
Actual results may differ materially, adversely or positively, from the expectations of the Company that are expressed or implied by any forward–looking statement. Risks, uncertainties, and factors that could cause the Company’s actual results to vary materially from those expressed or implied by any forward–looking statement include but are not limited to:
• changes in the level and volatility of interest rates, spreads on earning assets and interest bearing liabilities, and interest rate sensitivity;
• economic conditions and their impact on Horizon and its customers, including continuing increases in inflation;
• the monetary, trade and other regulatory policies of the U.S. government, including recent and anticipated interest rate increases;
• the increasing use of Bitcoin and other crypto currencies and/or stable coin and the possible impact these alternative currencies may have on deposit disintermediation and income derived from payment systems;
• loss of key Horizon personnel;
• increases in disintermediation, as new technologies allow consumers to complete financial transactions without the assistance of banks, which may have been accelerated by the pandemic;
• potential loss of fee income, including interchange fees, as new and emerging alternative payment platforms (e.g., Apple Pay or Bitcoin) take a greater market share of the payment systems;
• estimates of fair value of certain of Horizon’s assets and liabilities;
• volatility and disruption in financial markets;
• prepayment speeds, loan originations, credit losses and market values, collateral securing loans and other assets;
• sources of liquidity;
• potential risk of environmental liability related to lending and acquisition activities;
• changes in the competitive environment in Horizon’s market areas and among other financial service providers;
• continuing risks and uncertainties relating to the COVID–19 pandemic and government responses thereto;
• legislation and/or regulation affecting the financial services industry as a whole, and Horizon and its subsidiaries in particular;
• changes in regulatory supervision and oversight, including monetary policy and capital requirements;
• changes in accounting policies or procedures as may be adopted and required by regulatory agencies;
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2022 and 2021
• litigation, regulatory enforcement, tax, and legal compliance risk and costs, as applicable generally and specifically to the financial and fiduciary (generally and as an ESOP fiduciary) environment, especially if materially different from the amount we expect to incur or have accrued for, and any disruptions caused by the same;
• the effects and costs of governmental investigations or related actions by third parties;
• rapid technological developments and changes;
• the risks presented by cyber terrorism and data security breaches;
• the rising costs of effective cybersecurity;
• containing costs and expenses;
• the ability of the U.S. federal government to manage federal debt limits;
• the potential influence on the U.S. financial markets and economy from the effects of climate change and social justice initiatives;
• the potential influence on the U.S. financial markets and economy from material changes outside the U.S. or in overseas relations, including changes in the U.S. trade relations related to imposition of tariffs, Brexit and the phase out of the London Interbank Offered Rate (“LIBOR”) according to regulatory guidance;
• the risks of expansion through mergers and acquisitions, including unexpected credit quality problems with acquired loans, difficulty integrating acquired operations and material differences in the actual financial results of such transactions compared with Horizon’s initial expectations, including the full realization of anticipated cost savings; and
• acts of terrorism, war and global conflicts, such as the Russia and Ukraine conflict, and the potential impact they may have on supply chains, the availability of commodities, commodity prices, inflationary pressure and the overall U.S. and global financial markets.
The foregoing list of important factors is not exclusive, and you are cautioned not to place undue reliance on these forward–looking statements, which speak only as of the date of this document or, in the case of documents incorporated by reference, the dates of those documents. We do not undertake to update any forward–looking statements, whether written or oral, that may be made from time to time by us or on our behalf. For a detailed discussion of the risks and uncertainties that may cause our actual results or performance to differ materially from the results or performance expressed or implied by forward–looking statements, see “Risk Factors” in Item 1A of Part I of our 2021 Annual Report on Form 10–K and in the subsequent reports we file with the SEC.
Overview
Horizon Bancorp, Inc. (“Horizon” or the “Company”) is a registered bank holding company incorporated in Indiana and headquartered in Michigan City, Indiana. Horizon provides a broad range of banking services in northern and central Indiana and southern and central Michigan through its bank subsidiary, Horizon Bank (“Horizon Bank” or the “Bank”), and other affiliated entities and Horizon Risk Management, Inc. Horizon operates as a single segment, which is commercial banking. Horizon’s common stock is traded on the NASDAQ Global Select Market under the symbol HBNC. Horizon Bank was founded in 1873 as a national association, and it remained a national association until its conversion to an Indiana commercial bank effective June 23, 2017. The Bank is a full–service commercial bank offering commercial and retail banking services, corporate and individual trust and agency services, and other services incident to banking. Horizon Risk Management, Inc. is a captive insurance company incorporated in Nevada and was formed as a wholly–owned subsidiary of Horizon.
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2022 and 2021
Over the last 20 years, Horizon has expanded its geographic reach and experienced financial growth through a combination of both organic expansion and mergers and acquisitions. Horizon's initial operations focused on northwest Indiana, but since then, the Company has developed a presence in new markets in southern and central Michigan and northeastern and central Indiana.
Third Quarter 2022 Highlights
• Return on average assets (“ROAA”) was 1.29% year–to–date and 1.24% for the third quarter.
• Return on average common equity (“ROACE”) was 13.97% year–to–date and 13.89% for the third quarter.
• Return on average tangible equity was 18.73% year–to–date and 18.71% for the third quarter.
• Total loans, excluding Federal Paycheck Protection Program (“PPP”) loans and sold commercial participation loans, grew by an annualized rate of 14.5% year–to–date and an annualized rate of 7.8% quarter over quarter.
• Commercial loans, excluding PPP loans and sold commercial participation loans, grew by an annualized rate of 13.8% year–to–date and an annualized rate of 7.2% quarter over quarter to a record $2.35 billion.
• Consumer loans grew by an annualized rate of 31.7% year–to–date and an annualized rate of 23.9% quarter over quarter to a record $899.9 million at period end.
• Asset quality remains solid with total loan delinquency at 0.12% of total loans, net charge–offs to average loans of 0.00% and a reversal of credit loss expense during the quarter.
• Net interest income increased by $387,000 to $53.4 million during the third quarter compared to $53.0 million for the previous quarter.
• Reported net interest margin (“NIM”) was 3.13% and adjusted NIM was 3.08%, with reported NIM decreasing by six basis points and adjusted NIM decreasing by four basis points from the second quarter of 2022. (See the “Non–GAAP Reconciliation of Net Interest Margin” table below for the definition of this non–GAAP calculation of adjusted NIM.)
• Non–interest income is down $2.2 million for the quarter due to lower residential mortgage loan volume, resulting in lower gain on sale income, and from lower wealth management fees related to year–to–date declines in equity and bond markets.
• Non-interest expense was $38.4 million in the quarter, or 1.99% of average assets on an annualized basis, compared to $36.4 million, or 1.95%, in the second quarter of 2022. Year–to–date non–interest expense continues to be well managed at $111.3 million, or 1.99% of average assets on an annualized basis which is below our target of 2.00% of average assets.
• The effective tax rate for the third quarter dropped to 7.8% due to the recognition of solar tax credits as projects were put into service during the quarter.
• Net income totaled $23.8 million, down 4.2% from the prior quarter and up 3.3% from the prior year period. Diluted earnings per share (“EPS”) of $0.55 was down from $0.57 for the second quarter of 2022 and up from $0.52 for the third quarter of 2021.
• Asset sensitivity decreased in the quarter compared to the previous quarter end, as deposit betas increased with rising rates. Deposit beta is defined as the change in deposit costs as a percentage of the change in the federal funds rate over a particular period. Current estimates for parallel rate shocks to the balance sheet, at 100 basis points and 200 basis points, decrease net interest income by approximately $3.3 million and $6.7 million, respectively.
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2022 and 2021
• In a non–parallel rate model, the result is an estimated increase to net interest income of approximately $1.3 million, or 0.61%, at a 200 basis point move.
• When the entire balance sheet is valued in our models, the economic value of equity increased in the third quarter of 2022, when compared to the prior year quarter.
• Deposit betas increased to 23% on total interest bearing deposits in the third quarter compared to a 3% beta during the previous quarter.
• During the third quarter of 2022, the continued steepening of the yield curve resulted in unrealized losses on available for sale investments of $161.8 million compared to unrealized losses of $122.0 million at June 30, 2022. The impact to the tangible capital ratio was a decrease of 3.55% from 6.48% at June 30, 2022 to 6.25% at September 30, 2022.
• The Bank’s capital position is still robust with leverage and risk based capital ratios of 9.31% and 14.23%, respectively. The annualized dividend yield was 3.56% as of September 30, 2022.
Financial Summary
For the Three Months Ended
September 30, June 30, September 30,
Net Interest Income and Net Interest Margin 2022 2022 2021
Net interest income $ 53,395 $ 53,008 $ 46,544
Net interest margin 3.13 % 3.19 % 3.17 %
Adjusted net interest margin (See “Use of Non–GAAP Financial Measures”) 3.08 % 3.12 % 3.12 %
For the Three Months Ended
September 30, June 30, September 30,
Asset Yields and Funding Costs 2022 2022 2021
Interest earning assets 3.68 % 3.46 % 3.46 %
Interest bearing liabilities 0.69 % 0.34 % 0.38 %
For the Three Months Ended
Non–interest Income and
Mortgage Banking Income September 30, June 30, September 30,
2022 2022 2021
Total non–interest income $ 10,188 $ 12,434 $ 16,044
Gain on sale of mortgage loans 1,441 2,501 4,088
Mortgage servicing income net of impairment or recovery 355 319 336
For the Three Months Ended
September 30, June 30, September 30,
Non–interest Expense 2022 2022 2021
Total non–interest expense $ 38,350 $ 36,368 $ 34,349
Annualized non–interest expense to average assets 1.99 % 1.95 % 2.09 %
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2022 and 2021
At or for the Three Months Ended
Credit Quality September 30, June 30, September 30,
2022 2022 2021
Allowance for credit losses to total loans 1.28 % 1.33 % 1.55 %
Non–performing loans to total loans 0.48 % 0.51 % 0.80 %
Percent of net charge–offs to average loans outstanding for the period 0.00 % 0.01 % 0.00 %
Allowance for September 30, Net Reserve December 31,
Credit Losses 2022 3Q22 2Q22 1Q22 2021
Commercial $ 33,806 $ (996) $ (2,987) $ (2,986) $ 40,775
Retail Mortgage 5,137 715 71 495 3,856
Warehouse 1,024 (43) 12 (4) 1,059
Consumer 11,402 (657) 2,746 717 8,596
Allowance for Credit Losses (“ACL”)
$ 51,369 $ (981) $ (158) (1,778) $ 54,286
ACL/Total Loans 1.28 % 1.51 %
Critical Accounting Policies
The notes to the consolidated financial statements included in Item 8 of the Company’s Annual Report on Form 10–K for 2021 contain a summary of the Company’s significant accounting policies. Certain of these policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Management has identified as critical accounting policies the allowance for credit losses, goodwill and intangible assets, mortgage servicing rights, hedge accounting and valuation measurements.
Allowance for Credit Losses
The allowance for credit losses represents management’s best estimate of current expected credit losses over the life of the portfolio of loan and leases. Estimating credit losses requires judgment in determining loan specific attributes impacting the borrower’s ability to repay contractual obligations. Other factors such as economic forecasts used to determine a reasonable and supportable forecast, prepayment assumptions, the value of underlying collateral, and changes in size composition and risks within the portfolio are also considered.
The allowance for credit losses is assessed at each balance sheet date and adjustments are recorded in the provision for credit losses. The allowance is estimated based on loan level characteristics using historical loss rates, a reasonable and supportable economic forecast. Loan losses are estimated using the fair value of collateral for collateral–dependent loans, or when the borrower is experiencing financial difficulty such that repayment of the loan is expected to be made through the operation or sale of the collateral. Loan balances considered uncollectible are charged–off against the ACL. Recoveries of amounts previously charged–off are credited to the ACL. Assets purchased with credit deterioration (“PCD”) assets represent assets that are acquired with evidence of more than insignificant credit quality deterioration since origination at the acquisition date. At acquisition, the allowance for credit losses on PCD assets is booked directly the ACL. Any subsequent changes in the ACL on PCD assets is recorded through the provision for credit losses. Management believes that the ACL is adequate to absorb the expected life of loan credit losses on the portfolio of loans and leases as of the balance sheet date. Actual losses incurred may differ materially from our estimates.
Goodwill and Intangible Assets
Management believes that the accounting for goodwill and other intangible assets also involves a higher degree of judgment than most other significant accounting policies. FASB ASC 350–10 establishes standards for the amortization of acquired intangible assets and impairment assessment of goodwill. At September 30, 2022, Horizon had core deposit intangibles of $18.2 million subject to amortization and $155.2 million of goodwill, which is not subject to amortization. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. Horizon’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of Horizon
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2022 and 2021
to provide quality, cost effective banking services in a competitive marketplace. The goodwill value is supported by revenue that is in part driven by the volume of business transacted. A decrease in earnings resulting from a decline in the customer base or the inability to deliver cost effective services over sustained periods can lead to impairment of goodwill that could adversely affect earnings in future periods. FASB ASC 350–10 requires an annual evaluation of goodwill for impairment.
At each reporting date between annual goodwill impairment tests, Horizon considers potential indicators of impairment. Given the current economic uncertainty and volatility surrounding COVID–19, Horizon assessed whether the events and circumstances resulted in it being more likely than not that the fair value of any reporting unit was less than its carrying value. Impairment indicators considered comprised the condition of the economy and banking industry; government intervention and regulatory updates; the impact of recent events to financial performance and cost factors of the reporting unit; performance of the Company's stock and other relevant events. Horizon further considered the amount by which fair value exceeded book value in the most recent quantitative analysis and stress testing performed. At the conclusion of the most recent qualitative assessment, the Company determined that as of September 30, 2022, it was more likely than not that the fair value exceeded its carrying values. Horizon will continue to monitor developments regarding the COVID–19 pandemic and measures implemented in response to the pandemic, market capitalization, overall economic conditions and any other triggering events or circumstances that may indicate an impairment of goodwill in the future.
Mortgage Servicing Rights
Servicing assets are recognized as separate assets when rights are acquired through purchase or through the sale of financial assets on a servicing–retained basis. Capitalized servicing rights are amortized into non–interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated regularly for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying servicing rights by predominant characteristics, such as interest rates, original loan terms and whether the loans are fixed or adjustable rate mortgages. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market–based assumptions. When the book value of an individual stratum exceeds its fair value, an impairment reserve is recognized so that each individual stratum is carried at the lower of its amortized book value or fair value. In periods of falling market interest rates, accelerated loan prepayment can adversely affect the fair value of these mortgage–servicing rights relative to their book value. In the event that the fair value of these assets was to increase in the future, Horizon can recognize the increased fair value to the extent of the impairment allowance but cannot recognize an asset in excess of its amortized book value. Future changes in management’s assessment of the impairment of these servicing assets, as a result of changes in observable market data relating to market interest rates, loan prepayment speeds, and other factors, could impact Horizon’s financial condition and results of operations either positively or negatively.
Generally, when market interest rates decline and other factors favorable to prepayments occur, there is a corresponding increase in prepayments as customers refinance existing mortgages under more favorable interest rate terms. When a mortgage loan is prepaid, the anticipated cash flows associated with servicing that loan are terminated, resulting in a reduction of the fair value of the capitalized mortgage servicing rights. To the extent that actual borrower prepayments do not react as anticipated by the prepayment model (i.e., the historical data observed in the model does not correspond to actual market activity), it is possible that the prepayment model could fail to accurately predict mortgage prepayments and could result in significant earnings volatility. To estimate prepayment speeds, Horizon utilizes a third-party prepayment model, which is based upon statistically derived data linked to certain key principal indicators involving historical borrower prepayment activity associated with mortgage loans in the secondary market, current market interest rates and other factors, including Horizon’s own historical prepayment experience. For purposes of model valuation, estimates are made for each product type within the mortgage servicing rights portfolio on a monthly basis. In addition, on a quarterly basis Horizon engages a third party to independently test the value of its servicing asset.
Derivative Instruments
As part of the Company’s asset/liability management program, Horizon utilizes, from time–to–time, interest rate floors, caps or swaps to reduce the Company’s sensitivity to interest rate fluctuations. These are derivative instruments, which are recorded as assets or liabilities in the consolidated balance sheets at fair value. Changes in the fair values of derivatives are reported in the consolidated income statements or other comprehensive income (“OCI”) depending on the use of the derivative and whether the instrument qualifies for hedge accounting. The key criterion for the hedge accounting is that the hedged relationship must be highly effective in achieving offsetting changes in those cash flows that are attributable to the
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2022 and 2021
hedged risk, both at inception of the hedge and on an ongoing basis.
Horizon’s accounting policies related to derivatives reflect the guidance in FASB ASC 815–10. Derivatives that qualify for the hedge accounting treatment are designated as either: a hedge of the fair value of the recognized asset or liability or of an unrecognized firm commitment (a fair value hedge) or a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (a cash flow hedge). For fair value hedges, the cumulative change in fair value of both the hedge instruments and the underlying loans is recorded in non–interest income. For cash flow hedges, changes in the fair values of the derivative instruments are reported in OCI to the extent the hedge is effective. The gains and losses on derivative instruments that are reported in OCI are reflected in the consolidated income statement in the periods in which the results of operations are impacted by the variability of the cash flows of the hedged item. Generally, net interest income is increased or decreased by amounts receivable or payable with respect to the derivatives, which qualify for hedge accounting. At inception of the hedge, Horizon establishes the method it uses for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. The ineffective portion of the hedge, if any, is recognized currently in the consolidated statements of income. Horizon excludes the time value expiration of the hedge when measuring ineffectiveness.
Valuation Measurements
Valuation methodologies often involve a significant degree of judgment, particularly when there are no observable active markets for the items being valued. Investment securities, residential mortgage loans held for sale and derivatives are carried at fair value, as defined in FASB ASC 820, which requires key judgments affecting how fair value for such assets and liabilities is determined. In addition, the outcomes of valuations have a direct bearing on the carrying amounts of goodwill, mortgage servicing rights, and pension and other post–retirement benefit obligations. To determine the values of these assets and liabilities, as well as the extent, to which related assets may be impaired, management makes assumptions and estimates related to discount rates, asset returns, prepayment speeds and other factors. The use of different discount rates or other valuation assumptions could produce significantly different results, which could affect Horizon’s results of operations.
Financial Condition
On September 30, 2022, Horizon’s total assets were $7.7 billion, an increase of approximately $306.8 million compared to December 31, 2021. The increase in total assets was primarily in investments held to maturity of $479.1 million purchased and growth in net loans of $370.5 million. These increases were offset by decreases in cash and due from banks of $483.8 million used to fund the growth and investments available for sale of $175.2 million primarily due to unrealized losses.
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2022 and 2021
Investment securities were comprised of the following as of (dollars in thousands):
September 30, 2022 December 31, 2021
Amortized
Cost Fair
Value Amortized
Cost Fair
Value
Available for sale
U.S. Treasury and federal agencies $ 293,974 $ 266,254 $ 118,595 $ 116,979
State and municipal 505,975 415,246 632,652 639,746
Federal agency collateralized mortgage obligations 36,269 34,624 60,600 61,577
Federal agency mortgage–backed pools 226,785 194,641 257,185 257,691
Corporate notes 84,464 74,890 84,579 84,819
Total available for sale investment securities $ 1,147,467 $ 985,655 $ 1,153,611 $ 1,160,812
Held to maturity
U.S. Treasury and federal agencies $ 295,363 $ 248,008 $ 195,429 $ 194,226
State and municipal 1,128,034 885,903 862,461 878,917
Federal agency collateralized mortgage obligations 57,972 49,680 48,482 47,465
Federal agency mortgage–backed pools 349,875 292,516 247,937 244,136
Private labeled mortgage–backed pools 36,171 30,767 40,447 40,005
Corporate notes 164,121 133,715 157,687 155,242
Total held to maturity investment securities $ 2,031,536 $ 1,640,589 $ 1,552,443 $ 1,559,991
Investment securities available for sale decreased $175.2 million since December 31, 2021 to $985.7 million as of September 30, 2022 primarily due to unrealized losses and investment securities held to maturity increased $479.1 million since December 31, 2021 to $2.0 billion as of September 30, 2022. This increase in investments held to maturity was due to additional purchases to increase earning assets.
Net loans increased $370.5 million since December 31, 2021 to $4.0 billion as of September 30, 2022. Commercial loans, excluding PPP loans and sold commercial participation loans, increased $220.8 million, consumer loans increased $172.6 million and residential mortgage loans increased $40.5 million since December 31, 2021. These increases were offset by decreases in mortgage warehouse loans of $35.3 million, PPP loans of $25.5 million, loans held for sale of $10.7 million and sold commercial participation loans of $5.5 million since December 31, 2021.
Other assets increased $77.6 million since December 31, 2021 to $158.4 million as of September 30, 2022. This increase was primarily due to an increase in deferred tax assets related to the level of unrealized losses on available for sale securities of approximately $35.4 million and an increase in the unrealized gain of fair value hedges of approximately $31.1 million.
Total deposits increased $27.8 million since December 31, 2021 to $5.8 billion as of September 30, 2022, from organic growth.
Total borrowings increased to $1.0 billion as of September 30, 2022 from $712.7 million as of December 31, 2021. At September 30, 2022, the Company had $871.6 million in short–term funds borrowed compared to $180.8 million at December 31, 2021.
Stockholders’ equity totaled $645.0 million at September 30, 2022 compared to $723.2 million at December 31, 2021. The decrease in stockholders’ equity during the period was primarily due to a decrease in accumulated other comprehensive income of $130.5 million as unrealized losses on available for sale securities totaled $161.8 million and the amount of dividends paid during the quarter, offset by the generation of net income. Book value per common share at September 30, 2022 decreased to $14.80 compared to $15.10 at December 31, 2021.
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2022 and 2021
Results of Operations
Overview
Consolidated net income for the three–month period ended September 30, 2022 was $23.8 million, or $0.55 diluted earnings per share, compared to $23.1 million, or $0.52 diluted earnings per share for the same period in 2021. The increase in net income for the three–month period ended September 30, 2022 when compared to the same prior year period reflects an increase in net interest income of $6.9 million, a decrease in credit loss expense of $1.7 million and a decrease in income tax expense of $2.0 million, offset by an increase in non–interest expense of $4.0 million and a decrease in non–interest income of $5.9 million.
Consolidated net income for the nine–month period ended September 30, 2022 was $72.2 million, or $1.65 diluted earnings per share, compared to $65.7 million, or $1.49 diluted earnings per share for the same period in 2021. The increase in net income for the nine–month period ended September 30, 2022 when compared to the same prior year period reflects an increase in net interest income of $22.9 million, a decrease in credit loss expense of $1.7 million and a decrease in income tax expense of $1.7 million, offset by an increase in non–interest expense of $11.4 million and a decrease in non–interest income of $8.3 million.
Net Interest Income
The largest component of net income is net interest income. Net interest income is the difference between interest income, principally from loans and investment securities, less interest expense, principally on deposits and borrowings. Changes in the net interest income are the result of changes in volume and the net interest spread, which affects the net interest margin. Volume refers to the average dollar levels of interest earning assets and interest bearing liabilities. Net interest spread refers to the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities. Net interest margin refers to net interest income divided by average interest earning assets and is influenced by the level and relative mix of interest earning assets and interest bearing liabilities.
Net interest income during the three months ended September 30, 2022 was $53.4 million, an increase of $6.9 million from the $46.5 million earned during the same period in 2021. Yields on the Company’s interest earning assets increased by 22 basis points to 3.68% for the three months ended September 30, 2022 from 3.46% for the three months ended September 30, 2021. Interest income increased $12.2 million from $50.9 million for the three months ended September 30, 2021 to $63.0 million for the same period in 2022. The increase in interest income was due to an increase in average balances of interest earning assets of $1.0 billion during the three months ended September 30, 2022. Interest income from acquisition–related purchase accounting adjustments was $906,000 for the three months ended September 30, 2022 compared to $875,000 for the same period of 2021.
Rates paid on interest bearing liabilities increased by 31 basis points for the three–month period ended September 30, 2022 compared to the same period in 2021. Interest expense increased $5.3 million when compared to the three–month period ended September 30, 2021 to $9.6 million for the same period in 2022. This increase was due to higher rates paid on deposits and borrowings. The cost of average interest bearing deposits increased 17 basis points while the cost of average borrowings increased 96 basis points. Average balances of interest bearing deposits increased $647.1 million and average balances of borrowings increased $341.3 million for the three-month period ended September 30, 2022 when compared to the same period in 2021.
The net interest margin decreased four basis points from 3.17% for the three–month period ended September 30, 2021 to 3.13% for the same period in 2022. The decrease in the margin for the three–month period ended September 30, 2022 compared to the same period in 2021 was due to an increase in the cost of interest bearing liabilities, offset by a increase in the yield on interest earning assets. Excluding the interest income recognized from the acquisition–related purchase accounting adjustments (“adjusted net interest margin”), the margin would have been 3.08% for the three-month period ended September 30, 2022 compared to 3.12% for the same period in 2021.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2022 and 2021
The following are the average balance sheets for the three months ended (dollars in thousands):
Average Balance Sheets
(Dollar Amount in Thousands, Unaudited)
Three Months Ended Three Months Ended
September 30, 2022 September 30, 2021
Average
Balance Interest Average
Rate Average
Balance Interest Average
Rate
Assets
Interest earning assets
Federal funds sold $ 4,201 $ 24 2.27 % $ 310,180 $ 119 0.15 %
Interest earning deposits 9,994 41 1.63 % 26,352 39 0.59 %
Investment securities – taxable 1,728,197 8,436 1.94 % 1,063,177 4,407 1.64 %
Investment securities – non–taxable (1)
1,384,249 7,478 2.71 % 1,108,503 5,911 2.68 %
Loans receivable (2) (3)
3,910,889 47,051 4.79 % 3,524,876 40,392 4.56 %
Total interest earning assets 7,037,530 63,030 3.68 % 6,033,088 50,868 3.46 %
Non–interest earning assets
Cash and due from banks 99,221 87,799
Allowance for credit losses (52,303) (55,703)
Other assets 550,654 442,489
Total average assets $ 7,635,102 $ 6,507,673
Liabilities and Stockholders’ Equity
Interest bearing liabilities
Interest bearing deposits $ 4,478,741 $ 4,116 0.36 % $ 3,831,632 $ 1,808 0.19 %
Borrowings 813,873 3,756 1.83 % 472,551 1,035 0.87 %
Repurchase agreements 141,283 139 0.39 % 125,776 40 0.13 %
Subordinated notes 58,836 880 5.93 % 58,689 880 5.95 %
Junior subordinated debentures issued to capital trusts 56,928 744 5.19 % 56,684 561 3.93 %
Total interest bearing liabilities 5,549,661 9,635 0.69 % 4,545,332 4,324 0.38 %
Non–interest bearing liabilities
Demand deposits 1,351,857 1,180,890
Accrued interest payable and other liabilities 53,208 57,039
Stockholders’ equity 680,376 724,412
Total average liabilities and stockholders’ equity $ 7,635,102 $ 6,507,673
Net interest income/spread $ 53,395 2.99 % $ 46,544 3.08 %
Net interest income as a percent of average interest earning assets (1)
3.13 % 3.17 %
(1)
Securities balances represent daily average balances for the fair value of securities. The average rate is calculated based on the daily average balance for the amortized cost of securities. The average rate is presented on a tax equivalent basis.
(2)
Includes fees on loans. The inclusion of loan fees does not have a material effect on the average interest rate.
(3)
Non–accruing loans for the purpose of the computation above are included in the daily average loan amounts outstanding. Loan totals are shown net of unearned income and deferred loan fees. The average rate is presented on a tax equivalent basis.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2022 and 2021
Net interest income during the nine months ended September 30, 2022 was $154.6 million, an increase of $22.9 million from the $131.7 million earned during the same period in 2021. Yields on the Company’s interest earning assets decreased by 8 basis points to 3.45% for the nine months ended September 30, 2022 from 3.53% for the nine months ended September 30, 2021. Interest income increased $26.8 million from $145.9 million for the nine months ended September 30, 2021 to $172.7 million for the same period in 2022. The increase in interest income was due to an increase in average balances of interest earning assets of $1.2 billion during the nine months ended September 30, 2022. Interest income from acquisition–related purchase accounting adjustments was $3.0 million for the nine months ended September 30, 2022 compared to $2.7 million for the same period of 2021.
Rates paid on interest bearing liabilities increased by one basis points for the nine–month period ended September 30, 2022 compared to the same period in 2021. Interest expense increased $3.9 million when compared to the nine–month period ended September 30, 2021 to $18.1 million for the same period in 2022. This increase was due to higher rates paid on borrowings. The cost of average borrowings increased 9 basis points. Average balances of interest bearing deposits increased $819.5 million and average balances of borrowings increased $253.4 million for the nine-month period ended September 30, 2022 when compared to the same period in 2021.
The net interest margin decreased 17 basis points from 3.20% for the nine–month period ended September 30, 2021 to 3.03% for the same period in 2022. The decrease in the margin for the nine–month period ended September 30, 2022 compared to the same period in 2021 was due to a decrease in the yield on interest earning assets in addition to a slight increase in the cost of interest bearing liabilities. Excluding the interest income recognized from the acquisition–related purchase accounting adjustments (“adjusted net interest margin”), the margin would have been 2.97% for the nine-month period ended September 30, 2022 compared to 3.14% for the same period in 2021.
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2022 and 2021
The following are the average balance sheets for the nine months ended (dollars in thousands):
Average Balance Sheets
(Dollar Amount in Thousands, Unaudited)
Nine Months Ended Nine Months Ended
September 30, 2022 September 30, 2021
Average
Balance Interest Average
Rate Average
Balance Interest Average
Rate
Assets
Interest earning assets
Federal funds sold $ 82,667 $ 131 0.21 % $ 312,359 $ 284 0.12 %
Interest earning deposits 15,404 93 0.81 % 27,157 128 0.63 %
Investment securities – taxable 1,715,478 24,499 1.91 % 708,519 8,229 1.55 %
Investment securities – non–taxable (1)
1,346,173 21,482 2.70 % 1,040,447 16,790 2.73 %
Loans receivable (2) (3)
3,763,502 126,479 4.51 % 3,624,393 120,446 4.46 %
Total interest earning assets 6,923,224 172,684 3.45 % 5,712,875 145,877 3.53 %
Non–interest earning assets
Cash and due from banks 100,067 85,855
Allowance for credit losses (53,038) (56,885)
Other assets 503,281 455,181
Total average assets $ 7,473,534 $ 6,197,026
Liabilities and Stockholders’ Equity
Interest bearing liabilities
Interest bearing deposits $ 4,499,441 $ 7,289 0.22 % $ 3,679,970 $ 6,204 0.23 %
Borrowings 644,803 6,209 1.29 % 391,373 3,522 1.20 %
Repurchase agreements 140,837 216 0.21 % 118,891 118 0.13 %
Subordinated notes 58,800 2,641 6.01 % 58,653 2,641 6.02 %
Junior subordinated debentures issued to capital trusts 56,869 1,755 4.13 % 56,628 1,678 3.96 %
Total interest bearing liabilities 5,400,750 18,110 0.45 % 4,305,515 14,163 0.44 %
Non–interest bearing liabilities
Demand deposits 1,336,912 1,128,173
Accrued interest payable and other liabilities 44,343 53,751
Stockholders’ equity 691,529 709,587
Total average liabilities and stockholders’ equity $ 7,473,534 $ 6,197,026
Net interest income/spread $ 154,574 3.00 % $ 131,714 3.09 %
Net interest income as a percent of average interest earning assets (1)
3.03 % 3.20 %
(1)
Securities balances represent daily average balances for the fair value of securities. The average rate is calculated based on the daily average balance for the amortized cost of securities. The average rate is presented on a tax equivalent basis.
(2)
Includes fees on loans. The inclusion of loan fees does not have a material effect on the average interest rate.
(3)
Non–accruing loans for the purpose of the computation above are included in the daily average loan amounts outstanding. Loan totals are shown net of unearned income and deferred loan fees. The average rate is presented on a tax equivalent basis.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2022 and 2021
Rate/Volume Analysis
The following table illustrates the impact of changes in the volume of interest earning assets and interest bearing liabilities and interest rates on net interest income for the periods indicated.
Three Months Ended September 30, 2022 vs.
Three Months Ended September 30, 2021 Nine Months Ended September 30, 2022 vs.
Nine Months Ended September 30, 2021
Total
Change Change
Due to
Volume Change
Due to
Rate Total
Change Change
Due to
Volume Change
Due to
Rate
Interest Income
Federal funds sold $ (95) $ (882) $ 787 $ (153) $ (379) $ 226
Interest earning deposits 2 (142) 144 (35) (87) 52
Investment securities – taxable 4,029 12,436 (8,407) 16,270 18,719 (2,449)
Investment securities – non–taxable 1,567 7,477 (5,910) 4,692 8,259 (3,567)
Loans receivable 6,659 18,211 (11,552) 6,033 6,258 (225)
Total interest income $ 12,162 $ 37,100 $ (24,938) $ 26,807 $ 32,770 $ (5,963)
Interest Expense
Interest bearing deposits $ 2,308 $ 1,405 $ 903 $ 1,085 $ 1,798 $ (713)
Borrowings 2,721 5,652 (2,931) 2,687 3,241 (554)
Repurchase agreements 99 22 77 98 33 65
Subordinated notes — 9 (9) — 9 (9)
Junior subordinated debentures issued to capital trusts 183 10 173 77 10 67
Total interest expense 5,311 7,098 (1,787) 3,947 5,091 (1,144)
Net Interest Income $ 6,851 $ 30,002 $ (23,151) $ 22,860 $ 27,679 $ (4,819)
Credit Loss Expense
Horizon assesses the adequacy of its Allowance for Credit Losses (“ACL”) by regularly reviewing the performance of its loan portfolio. During the three–month period ended September 30, 2022, credit loss recovery totaled $601,000 compared to a credit loss expense of $1.1 million for the same period of 2021. During the three–month period ended September 30, 2022, commercial loan net charge–offs were $51,000, residential mortgage loan net recoveries were $75,000 and consumer loan net charge–offs were $162,000.
During the nine–month period ended September 30, 2022, credit loss expense totaled a recovery of $1.7 million compared to a credit loss recovery of $13,000 for the same period of 2021. During the nine–month period ended September 30, 2022, commercial loan net charge–offs were $14,000, residential mortgage loan net recoveries were $45,000 and consumer loan net charge–offs were $589,000.
The ACL balance at September 30, 2022 was $51.4 million, or 1.28% of total loans compared to an ACL balance of $54.3 million at December 31, 2021 or 1.51% of total loans. The decrease in the ACL to total loans ratio was primarily due to favorable asset quality with non–performing loans at 0.48% of total loans at period end and net charge–offs to average loans represented 0.00% for the third quarter of 2022.
As of September 30, 2022, non–performing loans totaled $19.2 million, reflecting a $139,000 increase from $19.0 million in non–performing loans as of December 31, 2021. Non–performing commercial loans decreased by $310,000, non–performing real estate loans increased by $42,000 and non–performing consumer loans increased by $407,000 at September 30, 2022 compared to December 31, 2021.
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2022 and 2021
Other Real Estate Owned (“OREO”) and repossessed assets totaled $3.2 million at September 30, 2022 compared to $1.5 million at December 31, 2021. The increase was primarily due to several former branch locations totaling $1.5 million being moved to OREO during the third quarter after being closed.
Non–interest Income
The following is a summary of changes in non–interest income for the three months ended September 30, 2022 and 2021 (table dollar amounts in thousands):
Three Months Ended
September 30, Amount Percent
2022 2021 Change Change
Non–interest Income
Service charges on deposit accounts $ 3,023 $ 2,291 $ 732 32.0 %
Wire transfer fees 148 210 (62) (29.5) %
Interchange fees 3,089 2,587 502 19.4 %
Fiduciary activities 1,203 2,124 (921) (43.4) %
Gain on sale of mortgage loans 1,441 4,088 (2,647) (64.8) %
Mortgage servicing net of impairment 355 336 19 5.7 %
Increase in cash surrender value of bank owned life insurance 814 534 280 52.4 %
Death benefit on bank owned life insurance — 517 (517) 0.0 %
Other income 115 3,357 (3,242) (96.6) %
Total non–interest income $ 10,188 $ 16,044 $ (5,856) (36.5) %
Total non–interest income was $5.9 million lower during the third quarter of 2022 compared to the same period of 2021. Residential mortgage loan activity during the third quarter of 2022 generated $1.4 million of income from the gain on sale of mortgage loans, down from $4.1 million for the same period in 2021 due to a lower volume of loans sold and a decrease in the percentage gain on loans sold. Other income was $3.2 million lower during the third quarter of 2022 compared to the same period of 2021. This decrease was primarily due to the gain on sale of ESOP trustee accounts totaling $2.3 million and the recovery of $876,000 from an acquired charged–off loan recorded during the third quarter of 2021. Fiduciary activities income was $921,000 lower during the third quarter of 2022 compared to the same period of 2021 primarily due to rapidly rising interest rates during the most recent quarter. Service charges on deposit accounts and interchange fees increased $732,000 and $502,000, respectively, when comparing the third quarter of 2022 to the same period of 2021 primarily due to the deposits acquired with the branch acquisition completed during the third quarter of 2021.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2022 and 2021
Nine Months Ended
September 30, Amount Percent
2022 2021 Change Change
Non–interest Income
Service charges on deposit accounts $ 8,651 $ 6,682 $ 1,969 29.5 %
Wire transfer fees 477 687 (210) (30.6) %
Interchange fees 9,451 7,819 1,632 20.9 %
Fiduciary activities 4,111 5,828 (1,717) (29.5) %
Gain on sale of investment securities — 914 (914) (100.0) %
Gain on sale of mortgage loans 5,969 14,996 (9,027) (60.2) %
Mortgage servicing net of impairment 4,163 2,052 2,111 102.9 %
Increase in cash surrender value of bank owned life insurance 1,843 1,547 296 19.1 %
Death benefit on bank owned life insurance 644 783 (139) (17.8) %
Other income 1,468 3,816 (2,348) (61.5) %
Total non–interest income $ 36,777 $ 45,124 $ (8,347) (18.5) %
Total non–interest income was $8.3 million lower for the nine–month period ended September 30, 2022 compared to the same period of 2021. Residential mortgage loan activity for the nine–month period ended September 30, 2022 generated $6.0 million of income from the gain on sale of mortgage loans, down from $15.0 million for the same period in 2021 due to a lower volume of loans sold and a decrease in the percentage gain on loans sold. Other income was $2.3 million lower during the nine–month period ended September 30, 2022 compared to the same period of 2021. This decrease was primarily due to the gain on sale of ESOP trustee accounts totaling $2.3 million recorded during 2021. Fiduciary activities income was $1.7 million lower during the nine–month period ended September 30, 2022 compared to the same period of 2021 primarily due to rapidly rising interest rates during the current year. Mortgage servicing income, net of impairment or recovery, increased $2.1 million for the nine–month period ended September 30, 2022 compared to the same period of 2021 due to an impairment recovery of $2.6 million recorded for the nine–month period ended September 30, 2022 as mortgage pre–payment speeds slowed. Service charges on deposit accounts and interchange fees increased $2.0 million and $1.6 million, respectively, when comparing the nine–month period ended September 30, 2022 to the same period of 2021 primarily due to the deposits acquired with the branch acquisition completed during the third quarter of 2021.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2022 and 2021
Non–interest Expense
The following is a summary of changes in non–interest expense for the three months ended September 30, 2022 and 2021 (table dollar amounts in thousands):
Three Months Ended
September 30, September 30,
2022 2021 Adjusted
Actual Acquisition
Expenses Adjusted Actual Acquisition
Expenses Adjusted Amount
Change Percent
Change
Non–interest Expense
Salaries and employee benefits $ 20,613 $ — $ 20,613 $ 18,901 $ (25) $ 18,876 $ 1,737 9.2 %
Net occupancy expenses 3,293 — 3,293 2,935 (13) 2,922 371 12.7 %
Data processing 2,539 — 2,539 2,526 (17) 2,509 30 1.2 %
Professional fees 552 — 552 522 (53) 469 83 17.7 %
Outside services and consultants 2,855 — 2,855 2,330 (401) 1,929 926 48.0 %
Loan expense 2,926 — 2,926 2,645 — 2,645 281 10.6 %
FDIC deposit insurance 670 — 670 279 — 279 391 140.1 %
Other losses 398 — 398 69 (1) 68 330 485.3 %
Other expenses 4,504 — 4,504 4,142 (289) 3,853 651 16.9 %
Total non–interest expense $ 38,350 $ — $ 38,350 $ 34,349 $ (799) $ 33,550 $ 4,800 14.3 %
Annualized Non–interest Exp. to Avg. Assets 1.99 % 1.99 % 2.09 % 2.05 %
Total non–interest expense was $4.0 million higher for the third quarter of 2022 when compared to the third quarter of 2021. The increases in expenses was primarily due to an increase in salaries and employee benefits of $1.7 million and an increase in outside services and consultants expense of $525,000, as well as increases in net occupancy expenses due to additional employees hired and branch locations acquired as a result of the 2021 branch acquisition, FDIC insurance expense, other expense due to the amortization of the intangible assets from the solar tax credits and other losses.
Annualized non–interest expense as a percent of average assets was 1.99% and 2.09% for the three months ended September 30, 2022 and 2021, respectively. Annualized non–interest expense, excluding acquisition expenses, as a percentage of average assets was 1.99% and 2.05% for the three months ended September 30, 2022 and 2021, respectively.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2022 and 2021
The following is a summary of changes in non–interest expense for the nine months ended September 30, 2022 and 2021 (table dollar amounts in thousands):
Nine Months Ended
September 30, September 30,
2022 2021 Adjusted
Actual Acquisition
Expenses Adjusted Actual Acquisition
Expenses Adjusted Amount
Change Percent
Change
Non–interest Expense
Salaries and employee benefits $ 60,305 $ — $ 60,305 $ 53,502 $ (25) $ 53,477 $ 6,828 12.8 %
Net occupancy expenses 10,044 — 10,044 9,337 (13) 9,324 720 7.7 %
Data processing 7,683 — 7,683 7,290 (17) 7,273 410 5.6 %
Professional fees 1,149 — 1,149 1,654 (104) 1,550 (401) (25.9) %
Outside services and consultants 7,865 — 7,865 6,252 (588) 5,664 2,201 38.9 %
Loan expense 7,968 — 7,968 8,574 — 8,574 (606) (7.1) %
FDIC deposit insurance 2,170 — 2,170 1,579 — 1,579 591 37.4 %
Other losses 928 — 928 358 (1) 357 571 159.9 %
Other expenses 13,216 — 13,216 11,363 (293) 11,070 2,146 19.4 %
Total non–interest expense $ 111,328 $ — $ 111,328 $ 99,909 $ (1,041) $ 98,868 $ 12,460 12.6 %
Annualized
Non–interest Exp. to Avg. Assets 1.99 % 1.99 % 2.16 % 2.13 %
Total non–interest expense was $11.4 million higher in the first nine months of 2022 when compared to the first nine months of 2021. The increase was primarily due to higher salaries and employee benefits of $6.8 million due to additional employees hired as a result of the 2021 branch acquisition, higher other expense of $1.9 million, higher outside services and consultants expense of $1.6 million, and was partially offset by a decrease of $606,000 in loan expense and a decrease of $505,000 in professional fees.
Annualized non–interest expense as a percent of average assets was 1.99% and 2.16% for the nine months ended September 30, 2022 and 2021, respectively. Annualized non–interest expense, excluding acquisition expenses, as a percentage of average assets was 1.99% and 2.13% for the nine months ended September 30, 2022 and 2021, respectively.
Income Taxes
Income tax expense totaled $2.0 million for the third quarter of 2022, a decrease of $2.0 million when compared to the second quarter of 2022 and a decrease of $2.0 million when compared to the third quarter of 2021 due to the recognition of solar tax credits as projects were put into service during the quarter, which reduced the effective tax rate to 7.8%.
Income tax expense totaled $9.5 million for the nine months ended September 30, 2022, a decrease of $1.7 million when compared to the nine months ended September 30, 2021.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2022 and 2021
Liquidity
The Bank maintains a stable base of core deposits provided by long–standing relationships with individuals and local businesses. These deposits are the principal source of liquidity for Horizon. Other sources of liquidity for Horizon include earnings, loan repayment, investment security sales and maturities, proceeds from the sale of residential mortgage loans, unpledged investment securities and borrowing relationships with correspondent banks, including the FHLB. At September 30, 2022, in addition to liquidity available from the normal operating, funding, and investing activities of Horizon, the Bank had approximately $917.6 million in unused credit lines with various money center banks, including the FHLB and the FRB Discount Window compared to $672.7 million at December 31, 2021. The Bank had approximately $2.2 billion of unpledged investment securities at September 30, 2022 compared to $2.0 billion at December 31, 2021.
Capital Resources
The capital resources of Horizon and the Bank exceeded regulatory capital ratios for “well capitalized” banks at September 30, 2022. Stockholders’ equity totaled $645.0 million as of September 30, 2022, compared to $723.2 million as of December 31, 2021. For the nine months ended September 30, 2022, the ratio of average stockholders’ equity to average assets was 8.91% compared to 10.93% for the twelve months ended December 31, 2021. The decrease in stockholders’ equity during the period was due to a decrease in accumulated other comprehensive income of $30.1 million and the amount of dividends paid, offset by net income recorded during the period.
Horizon declared common stock dividends in the amount of $0.47 per share during the first nine months of 2022 and $0.41 per share for the same period of 2021. The dividend payout ratio (dividends as a percent of basic earnings per share) was 28.3% and 27.3% for the first nine months of 2022 and 2021, respectively. For additional information regarding dividends, see Horizon’s Annual Report on Form 10-K for 2021.
Use of Non–GAAP Financial Measures
Certain information set forth in this quarterly report on Form 10–Q refers to financial measures determined by methods other than in accordance with GAAP. Specifically, we have included non–GAAP financial measures relating to net income, diluted earnings per share, net interest margin, tangible stockholders’ equity, tangible book value per share, efficiency ratio, the return on average assets, the return on average common equity, the return on average tangible equity and pre–tax pre–provision net income. In each case, we have identified special circumstances that we consider to be adjustments and have excluded them, to show the impact of such events as acquisition–related purchase accounting adjustments, among others we have identified in our reconciliations. Horizon believes that these non–GAAP financial measures are helpful to investors and provide a greater understanding of our business and financial results without giving effect to the purchase accounting impacts and other adjustments. These measures are not necessarily comparable to similar measures that may be presented by other companies and should not be considered in isolation or as a substitute for the related GAAP measure. See the tables and other information below and contained elsewhere in this Report on Form 10–Q for reconciliations of the non–GAAP figures identified herein and their most comparable GAAP measures.
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2022 and 2021
Non–GAAP Reconciliation of Net Income
(Dollars in Thousands, Unaudited)
Three Months Ended Nine Months Ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
2022 2022 2022 2021 2021 2022 2021
Net income as reported $ 23,821 $ 24,859 $ 23,563 $ 21,425 $ 23,071 $ 72,243 $ 65,666
Acquisition expenses — — — 884 799 — 1,041
Tax effect — — — (184) (166) — (217)
Net income excluding acquisition expenses 23,821 24,859 23,563 22,125 23,704 72,243 66,490
Credit loss expense acquired loans — — — — 2,034 — 2,034
Tax effect — — — — (427) — (427)
Net income excluding credit loss expense acquired loans 23,821 24,859 23,563 22,125 25,311 72,243 68,097
Gain on sale of ESOP trustee accounts — — — — (2,329) — (2,329)
Tax effect — — — — 489 — 489
Net income excluding gain on sale of ESOP trustee accounts 23,821 24,859 23,563 22,125 23,471 72,243 66,257
DOL ESOP settlement expenses — — — 1,900 — — —
Tax effect — — — (315) — — —
Net income excluding DOL ESOP settlement expenses 23,821 24,859 23,563 23,710 23,471 72,243 66,257
(Gain)/loss on sale of investment
securities — — — — — — (914)
Tax effect — — — — — — 192
Net income excluding (gain)/loss on sale of investment securities 23,821 24,859 23,563 23,710 23,471 72,243 65,535
Death benefit on bank owned life insurance (“BOLI”) — (644) — — (517) (644) (783)
Net income excluding death benefit on BOLI 23,821 24,215 23,563 23,710 22,954 71,599 64,752
Prepayment penalties on borrowings — — — — — — 125
Tax effect — — — — — — (26)
Net income excluding prepayment penalties on borrowings 23,821 24,215 23,563 23,710 22,954 71,599 64,851
Adjusted net income $ 23,821 $ 24,215 $ 23,563 $ 23,710 $ 22,954 $ 71,599 $ 64,851
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Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2022 and 2021
Non–GAAP Reconciliation of Diluted Earnings per Share
(Unaudited)
Three Months Ended Nine Months Ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
2022 2022 2022 2021 2021 2022 2021
Diluted earnings per share (“EPS”) as reported $ 0.55 $ 0.57 $ 0.54 $ 0.49 $ 0.52 $ 1.65 $ 1.49
Acquisition expenses — — — 0.02 0.02 — 0.02
Tax effect — — — — — — —
Diluted EPS excluding acquisition expenses 0.55 0.57 0.54 0.51 0.54 1.65 1.51
Credit loss expense acquired loans — — — — 0.05 — 0.05
Tax effect — — — — (0.01) — (0.01)
Diluted EPS excluding credit loss expense acquired loans 0.55 0.57 0.54 0.51 0.58 1.65 1.55
Gain on sale of ESOP trustee accounts — — — — (0.05) — (0.05)
Tax effect — — — — 0.01 — 0.01
Diluted EPS excluding gain on sale of ESOP trustee accounts 0.55 0.57 0.54 0.51 0.54 1.65 1.51
DOL ESOP settlement expenses — — — 0.04 — — —
Tax effect — — — (0.01) — — —
Diluted EPS excluding DOL ESOP settlement expenses 0.55 0.57 0.54 0.54 0.54 1.65 1.51
(Gain)/loss on sale of investment securities — — — — — — (0.02)
Tax effect — — — — — — —
Diluted EPS excluding (gain)/loss on investment securities 0.55 0.57 0.54 0.54 0.54 1.65 1.49
Death benefit on BOLI — (0.01) — — (0.02) (0.01) (0.03)
Diluted EPS excluding death benefit on BOLI 0.55 0.56 0.54 0.54 0.52 1.64 1.46
Prepayment penalties on borrowings — — — — — — —
Tax effect — — — — — — —
Diluted EPS excluding prepayment penalties on borrowings 0.55 0.56 0.54 0.54 0.52 1.64 1.46
Adjusted Diluted EPS $ 0.55 $ 0.56 $ 0.54 $ 0.54 $ 0.52 $ 1.64 $ 1.46
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2022 and 2021
Non–GAAP Reconciliation of Pre–Tax, Pre–Provision Net Income
(Dollars in Thousands, Unaudited)
Three Months Ended Nine Months Ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
2022 2022 2022 2021 2021 2022 2021
Pre–tax income $ 25,834 $ 28,834 $ 27,102 $ 25,505 $ 27,127 $ 81,770 $ 76,942
Credit loss expense (reversal) (601) 240 (1,386) (2,071) 1,112 (1,747) (13)
Pre–tax, pre–provision net income $ 25,233 $ 29,074 $ 25,716 $ 23,434 $ 28,239 $ 80,023 $ 76,929
Pre–tax, pre–provision net income $ 25,233 $ 29,074 $ 25,716 $ 23,434 $ 28,239 $ 80,023 $ 76,929
Acquisition expenses — — — 884 799 — 1,041
Gain on sale of ESOP trustee accounts — — — — (2,329) — (2,329)
DOL ESOP settlement expenses — — — 1,900 — — —
(Gain)/loss on sale of investment securities — — — — — — (914)
Death benefit on bank owned life insurance — (644) — — (517) (644) (783)
Prepayment penalties on borrowings — — — — — — 125
Adjusted pre–tax, pre–provision net income $ 25,233 $ 28,430 $ 25,716 $ 26,218 $ 26,192 $ 79,379 $ 74,069
Non–GAAP Reconciliation of Net Interest Margin
(Dollars in Thousands, Unaudited)
Three Months Ended Nine Months Ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
2022 2022 2022 2021 2021 2022 2021
Net interest income as reported $ 53,395 $ 53,008 $ 48,171 $ 49,976 $ 46,544 $ 154,574 $ 131,714
Average interest earning assets 7,037,530 6,927,310 6,800,549 6,938,258 6,033,088 6,923,224 5,712,875
Net interest income as a percentage of average interest earning assets
(“Net Interest Margin”) 3.13 % 3.19 % 2.99 % 2.97 % 3.17 % 3.03 % 3.20 %
Net interest income as reported $ 53,395 $ 53,008 $ 48,171 $ 49,976 $ 46,544 $ 154,574 $ 131,714
Acquisition–related purchase accounting adjustments
(“PAUs”) (906) (1,223) (916) (1,819) (875) (3,045) (2,684)
Prepayment penalties on borrowings — — — — — — 125
Adjusted net interest income $ 52,489 $ 51,785 $ 47,255 $ 48,157 $ 45,669 $ 151,529 $ 129,155
Adjusted net interest margin 3.08 % 3.12 % 2.93 % 2.86 % 3.12 % 2.97 % 3.14 %
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2022 and 2021
Non–GAAP Reconciliation of Tangible Stockholders’ Equity and Tangible Book Value per Share
(Dollars in Thousands Except per Share Data, Unaudited)
September 30, June 30, March 31, December 31, September 30,
2022 2022 2022 2021 2021
Total stockholders’ equity $ 644,993 $ 657,865 $ 677,450 $ 723,209 $ 708,542
Less: Intangible assets 173,375 173,662 174,588 175,513 183,938
Total tangible stockholders’ equity $ 471,618 $ 484,203 $ 502,862 $ 547,696 $ 524,604
Common shares outstanding 43,574,151 43,572,796 43,572,796 43,547,942 43,520,694
Book value per common share $ 14.80 $ 15.10 $ 15.55 $ 16.61 $ 16.28
Tangible book value per common
share $ 10.82 $ 11.11 $ 11.54 $ 12.58 $ 12.05
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2022 and 2021
Non–GAAP Calculation and Reconciliation of Efficiency Ratio and Adjusted Efficiency Ratio
(Dollars in Thousands, Unaudited)
Three Months Ended Nine Months Ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
2022 2022 2022 2021 2021 2022 2021
Non–interest expense as reported $ 38,350 $ 36,368 $ 36,610 $ 39,370 $ 34,349 $ 111,328 $ 99,909
Net interest income as reported 53,395 53,008 48,171 49,976 46,544 154,574 131,714
Non–interest income as reported $ 10,188 $ 12,434 $ 14,155 $ 12,828 $ 16,044 $ 36,777 $ 45,124
Non–interest expense/(Net interest income + Non–interest income)
("Efficiency
Ratio") 60.31 % 55.57 % 58.74 % 62.69 % 54.88 % 58.18 % 56.50 %
Non–interest expense as reported $ 38,350 $ 36,368 $ 36,610 $ 39,370 $ 34,349 $ 111,328 $ 99,909
Acquisition expenses — — — (884) (799) — (1,041)
DOL ESOP settlement expenses — — — (1,900) — — —
Non–interest expense excluding acquisition expenses and DOL ESOP settlement expenses 38,350 36,368 36,610 36,586 33,550 111,328 98,868
Net interest income as reported 53,395 53,008 48,171 49,976 46,544 154,574 131,714
Prepayment penalties on borrowings — — — — — — 125
Net interest income excluding prepayment penalties on borrowings 53,395 53,008 48,171 49,976 46,544 154,574 131,839
Non–interest income as reported 10,188 12,434 14,155 12,828 16,044 36,777 45,124
Gain on sale of ESOP trustee accounts — — — — (2,329) — (2,329)
(Gain)/loss on sale of investment securities — — — — — — (914)
Death benefit on bank owned life insurance ("BOLI") — (644) — — (517) (644) (783)
Non–interest income excluding (gain)/loss on sale of investment securities and death benefit on BOLI $ 10,188 $ 11,790 $ 14,155 $ 12,828 $ 13,198 $ 36,133 $ 41,098
Adjusted efficiency ratio 60.31 % 56.13 % 58.74 % 58.25 % 56.16 % 58.38 % 57.17 %
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2022 and 2021
Non–GAAP Reconciliation of Return on Average Assets
(Dollars in Thousands, Unaudited)
Three Months Ended Nine Months Ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
2022 2022 2022 2021 2021 2022 2021
Average assets $ 7,635,102 $ 7,476,238 $ 7,319,675 $ 7,461,343 $ 6,507,673 $ 7,473,534 $ 6,197,026
Return on average assets ("ROAA") as reported 1.24 % 1.33 % 1.31 % 1.14 % 1.41 % 1.29 % 1.42 %
Acquisition expenses — — — 0.05 0.05 — 0.02
Tax effect — — — (0.01) (0.01) — —
ROAA excluding acquisition expenses 1.24 1.33 1.31 1.18 1.45 1.29 1.44
Credit loss expense acquired loans — — — — 0.12 — 0.04
Tax effect — — — — (0.03) — (0.01)
ROAA excluding credit loss expense acquired loans 1.24 1.33 1.31 1.18 1.54 1.29 1.47
Gain on sale of ESOP trustee accounts — — — — (0.14) — (0.05)
Tax effect — — — — 0.03 — 0.01
ROAA excluding gain on sale of ESOP trustee accounts 1.24 1.33 1.31 1.18 1.43 1.29 1.43
DOL ESOP settlement expenses — — — 0.10 — — —
Tax effect — — — (0.02) — — —
ROAA excluding DOL ESOP settlement expenses 1.24 1.33 1.31 1.26 1.43 1.29 1.43
(Gain)/loss on sale of investment securities — — — — — — (0.02)
Tax effect — — — — — — —
ROAA excluding (gain)/loss on sale of investment securities 1.24 1.33 1.31 1.26 1.43 1.29 1.41
Death benefit on bank owned life insurance ("BOLI") — (0.03) — — (0.03) (0.01) (0.02)
ROAA excluding death benefit on BOLI 1.24 1.30 1.31 1.26 1.40 1.28 1.39
Prepayment penalties on borrowings — — — — — — —
Tax effect — — — — — — —
ROAA excluding prepayment penalties on borrowings 1.24 1.30 1.31 1.26 1.40 1.28 1.39
Adjusted ROAA 1.24 % 1.30 % 1.31 % 1.26 % 1.40 % 1.28 % 1.39 %
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2022 and 2021
Non–GAAP Reconciliation of Return on Average Common Equity
(Dollars in Thousands, Unaudited)
Three Months Ended Nine Months Ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
2022 2022 2022 2021 2021 2022 2021
Average common equity $ 680,376 $ 677,299 $ 716,341 $ 719,643 $ 724,412 $ 691,529 $ 709,587
Return on average common equity ("ROACE") as reported 13.89 % 14.72 % 13.34 % 11.81 % 12.64 % 13.97 % 12.37 %
Acquisition expenses — — — 0.49 0.44 — 0.20
Tax effect — — — (0.10) (0.09) — (0.04)
ROACE excluding acquisition expenses 13.89 14.72 13.34 12.20 12.99 13.97 12.53
Credit loss expense acquired loans — — — — 1.11 — 0.38
Tax effect — — — — (0.23) — (0.08)
ROACE excluding credit loss expense acquired loans 13.89 14.72 13.34 12.20 13.87 13.97 12.83
Gain on sale of ESOP trustee accounts — — — — (1.28) — (0.44)
Tax effect — — — — 0.27 — 0.09
ROACE excluding gain on sale of ESOP trustee accounts 13.89 14.72 13.34 12.20 12.86 13.97 12.48
DOL ESOP settlement expenses — — — 1.05 — — —
Tax effect — — — (0.17) — — —
ROACE DOL ESOP settlement expenses 13.89 14.72 13.34 13.08 12.86 13.97 12.48
(Gain)/loss on sale of investment securities — — — — — — (0.17)
Tax effect — — — — — — 0.04
ROACE excluding (gain)/loss on sale of investment securities 13.89 14.72 13.34 13.08 12.86 13.97 12.35
Death benefit on bank owned life insurance ("BOLI") — (0.38) — — (0.28) (0.12) (0.15)
ROACE excluding death benefit on BOLI 13.89 14.34 13.34 13.08 12.58 13.85 12.20
Prepayment penalties on borrowings — — — — — — 0.02
Tax effect — — — — — — —
ROACE excluding prepayment penalties on borrowings 13.89 14.34 13.34 13.08 12.58 13.85 12.22
Adjusted ROACE 13.89 % 14.34 % 13.34 % 13.08 % 12.58 % 13.85 % 12.22 %
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HORIZON BANCORP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
For the Three and Nine Months ended September 30, 2022 and 2021
Non–GAAP Reconciliation of Return on Average Tangible Equity
(Dollars in Thousands, Unaudited)
Three Months Ended Nine Months Ended
September 30, June 30, March 31, December 31, September 30, September 30, September 30,
2022 2022 2022 2021 2021 2022 2021
Average common equity $ 680,376 $ 677,299 $ 716,341 $ 719,643 $ 724,412 $ 691,529 $ 709,587
Less: Average intangible assets 175,321 175,321 176,356 179,594 174,920 175,836 174,537
Average tangible equity $ 505,055 $ 501,978 $ 539,985 $ 540,049 $ 549,492 $ 515,693 $ 535,050
Return on average common equity ("ROATE") 18.71 % 19.86 % 17.70 % 15.74 % 16.66 % 18.73 % 16.41 %
Acquisition expenses — — — 0.65 0.58 — 0.26
Tax effect — — — (0.14) (0.12) — (0.06)
ROATE excluding acquisition expenses 18.71 19.86 17.70 16.25 17.12 18.73 16.61
Credit loss expense acquired loans — — — — 1.47 — 0.51
Tax effect — — — — (0.31) — (0.11)
ROATE excluding credit loss expense acquired loans 18.71 19.86 17.70 16.25 18.28 18.73 17.01
Gain on sale of ESOP trustee accounts — — — — (1.68) — (0.58)
Tax effect — — — — 0.35 — 0.13
ROATE excluding gain on sale of ESOP trustee accounts 18.71 19.86 17.70 16.25 16.95 18.73 16.56
DOL ESOP settlement expenses — — — 1.40 — — —
Tax effect — — — (0.23) — — —
ROATE DOL ESOP settlement expenses 18.71 19.86 17.70 17.42 16.95 18.73 16.56
(Gain)/loss on sale of investment securities — — — — — — (0.23)
Tax effect — — — — — — 0.05
ROATE excluding (gain)/loss on sale of investment securities 18.71 19.86 17.70 17.42 16.95 18.73 16.38
Death benefit on bank owned life insurance ("BOLI") — (0.51) — — (0.37) (0.17) (0.20)
ROATE excluding death benefit on BOLI 18.71 19.35 17.70 17.42 16.58 18.56 16.18
Prepayment penalties on borrowings — — — — — — 0.03
Tax effect — — — — — — (0.01)
ROATE excluding prepayment penalties on borrowings 18.71 19.35 17.70 17.42 16.58 18.56 16.20
Adjusted ROATE 18.71 % 19.35 % 17.70 % 17.42 % 16.58 % 18.56 % 16.20 %
76
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We refer you to Horizon's 2021 Annual Report on Form 10–K for analysis of its interest rate sensitivity. Horizon believes there have been no significant changes in its interest rate sensitivity since it was reported in its 2021 Annual Report on Form 10–K.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.